Figure 1 below shows the price of natural gas over the previous eight years. From figure 1 it can be seen that the price of natural gas has fluctuated a great deal throughout this period. This is due to a variety of different factors, both external and internal to the industry, for example, Japan the 2011 Tohoku earthquake and tsunami. In an essay of 1500 words I will be using an economics analysis to explain why the changes in the price of natural gas over the periods of 2009 to 2017 and why the price fluctuations have been so great…
Natural gas prices are mainly a function of market supply and demand. (EIA,2016) Since there is a constrained short-term alternatives to natural gas as fuel for heating and electricity generation amid highly request periods, changes in supply or demand over a brief period may bring about vast value changes. Costs themselves regularly act to adjust free market activity.
Factors in the supply-side that influence costs incorporate gas generation, net imports and underground storage levels. Increases in supply tend to pull costs down, whilst a diminish in supply tend to drive costs up. Elevation in costs have a tendency to lead to a great production rate, imports and deals from storage inventories. Declining costs tend too lead to inconsistent impact.
Factors on the demand side incorporate climate (temperatures), monetary conditions and perineum costs. Frosty climate (low temperatures) expands interest for warming, while sweltering climate (high temperatures) increment interest for cooling which increment flammable gas request by electric power plants. Financial conditions impact interest for gaseous petrol, particularly by producers. Request might be directed by oil fuel costs, which might be a conservative substitutes for flammable gas for control generators, makers, and extensive building proprietors. Higher request tends to prompt higher costs, while bring down request can prompt lower costs. Increment and reduction in costs have a tendency to decrease or increment request.
Variables influencing Natural Gas Prices
As a result of constrained options for gaseous petrol utilisation or creations in the close term, even little changes in supply or request over a brief period can bring about expansive value developments that bring free market activity once again into adjust. Increment in supply general outcome in bring down costs and reductions in supply tend to prompt increments in costs.. Increments sought after for the most part prompt higher costs, while diminish popular tend to prompt lower costs. Thusly, higher costs tend to direct or decrease request and empower generation, and lower costs have a tendency to have the contrary impacts.
Three noteworthy supply side elements influencing costs
– Measure of gaseous petrol generation
– Level of gaseous petrol away
– Volumes of gaseous petrol imports and fares
Three noteworthy request side components influencing costs
– Varieties in winter and summer climate
Level of financial matters development
Accessibility and costs of contending powers
Economic growth can affect natural gas demand and prices
The strength of the economy influences natural gas markets. During periods of economic growth, increases in demand for goods and services from the commercial and industrial sectors may increase natural gas consumption. Economic-related increase in consumption can be particularly strong in the industry sector, which uses natural gas as a fuel and a feedstock for making many products such as fertiliser and pharmaceuticals. (https://www.eia.gov/outlooks/archive/aeo14/section_issues.cfm#ngp_indus)
Competition with other fuels can influence natural gas prices
Some large-volume fuel consumers scubas electricity producers and iron, steel and paper mills can with between natural gas, coal and petroleum, depending on the costa of each fuel. When the cost of the other fuels fall, demand for natural gas may increase natural gas prices. When the cost of competing fuels rise relative to the cost of natural gas, switching form those fuels to natural gas may increase natural gas demand and prices. In 2016 , more electricity was generated from natural gas than coal (https://www.eia.gov/todayinenergy/detail.php?id=31672) for the first time on record, and a natural gas was the largest source of overall electricity generation.
Why natural gas prices are so low?
Four reasons, I found that explain why natural gas prices are so low:
Storage may be too full. The direct problem at the current moment in time is that the facility used to store natural gasses become too full at certain points in the year, when this occurs there is little space left for additional natural gas supply to be topped up during the summer months. In addition warmer winter has played part to the over-supply of natural gas since the winter’s draw down from the underground storage was else then expected.
(Figure 3. March 22 figure by the US Energy Information Administration showing actual natural gas in storage (red) compared to expected range.)
2. Little growth in historical uses. One of the underlying reasons why there is a mismatch between supply and demand is the fact that since 1997, US natural gas consumption has remained close to flat, regardless of price (Figure 4, below). With very low prices in 2011, consumption rose by 2.2% in 2011 compared to 2010.
Figure 4. US natural gas consumption by end use, based on EIA data.
Natural gas prices recently have been low enough to compete with coal prices. Even at these low price levels, there has been little increase in industrial demand, and no effect on residential and commercial usage (for heating of buildings, hot water, and cooking).
Industrial demand used to be the largest source of natural gas use, but this has been trending downward. Part of this downward trend is likely related to industries moving overseas for reasons related to wages. (Part may be related to spiking natural gas prices, as well.) Residential and commercial use has not been growing because furnaces have been becoming more efficient, and because more attention is being paid to insulation and other conservation measures.
Figure 5. US dry gas supply, divided between US produced and net imports.
3. Supply doesn’t drop quickly. Natural gas supply (Figure 5, above) does not drop very quickly when prices drop too low because long lead times and large investment is needed to bring supply on-line. Natural gas producers have debt to service and are often faced with “use it or lose it” leases, so are hesitant to stop, for fear of not being able to make use of their investment. A decline in price may be hedged, so the producer does not feel the effect as quickly as otherwise, and take appropriate action.
Profitability of individual wells is based on estimates of long-term future production and future costs–things which are not at all certain. Some small producers may not even be aware of how unprofitable current prices really are.
There is also the issue of large oil and gas companies having difficulty “replacing their oil reserves,” and needing natural gas reserves to substitute for oil reserves. These large oil companies are willing to buy natural gas companies, even if the cost would seem to be far too high, given recent prices. These willing buyers allow production to keep expanding, creating a greater over-supply situation before a shake-out occurs.
It might be noted that supply (Figure 5) is actually not rising very quickly, but given the slow rise in demand (2.2% in 2011), it is overwhelming the system. In 2011, US production of dry natural gas increased by 7.8% over 2010, but this increase is partly offset by an offset by a decrease in imports. When net imports are included, US dry gas supply for 2011 is up by 3.9% over 2010. The low growth in natural gas demand in 2011, plus the warm winter extending into 2012, has been enough to produce very low natural gas prices.